>RELIANCE INFRA: Improvement in Mumbai/Delhi

■ Raising target price — Our 19% TP increase to Rs722 factors in (1) EPS increases of 54% & 19% in FY12E & FY13E, (2) increase in parent target EV/EBITDA to 7x (from 6x) on better op performance, (3) R-Power at 20% discount to mkt price of Rs110 (from Rs85). R-Infra’s 3Q12 cons BVPS was Rs945. Even if we knock off investments in pref shares/ICDs and regulatory assets in Delhi/Mumbai and add back recoveries, the adjusted cons BVPS is Rs703. This provides valuation support. We remove the High Risk rating as regulatory overhang in Mumbai and Delhi distribution now eliminated.


■ Parent PAT +151% YoY, Cons PAT +4% YoY — Parent 3Q12 PAT at Rs4.2bn was up 151% YoY led by 181% YoY growth in EPC sales, and higher margins in power and EPC. 9M12 parent recurring PAT at Rs11.6bn is +99% YoY. Cons PAT at Rs4.1bn grew at slower rate of +4% YoY on elimination of internal EPC sales/profits and losses in infra projects at PBIT level. 9M12 Recurring PAT at Rs10.2bn is down 8% YoY. The company has bought back 4.43mn shares for Rs2.34bn thru 14-Feb-2012.


■ Update on regulatory assets — In Mumbai, distribution R-Infra has accrued regulatory assets of Rs22bn. According to mgmt, MERC has approved recovery of Rs48bn over six years; NPV works out to Rs35bn. In Delhi, distribution R-Infra has accrued regulatory assets of Rs82bn and has made claims for recovery of Rs144bn. The company has also infused Rs5.2bn in Delhi and currently has a stake of 51%.


■ Improvement in Mumbai/Delhi — Renewal of distribution license for 25 years has removed uncertainty. Regulations are clear that distribution license and assets are different and R-Infra can decide to let any other distribution licensee (except Tata Power) use its network on commercial terms. With decline in load from 1.3GW to 1GW, power purchase costs have come down and regulator has approved levy of crosssubsidy charge on customers migrating to Tata Power. In Delhi, R-Infra has infused Rs5.2bn and Delhi Government has infused Rs5.0bn. A package of Rs51bn has been approved by IDBI Bank and tariff has been hiked 22%.


To read full report: RELIANCE INFRA
RISH TRADER

>STATE BANK OF INDIA: Bank booked INR1.1bn loss in treasury largely from the equity book

3QFY12 earnings came in at IN 32.6bn, in line with our estimates. NIM surprised positively yet again, only to be offset against higher loan loss provisions. The stock ended Monday (13 February) 2% below its previous day’s close.


Highlights: Core operating performance continues to remain strong for SBI with the loan book growing higher than system supported by robust and improving margins (4.05%), which were largely domestic driven (4.4%) and contained operating costs. The Bank booked INR1.1bn loss in treasury largely from the equity book, but also wrote back investment depreciation of INR8.7 bn. Although asset quality continued to disappoint with high slippages of c4% (INR81.6bn) and weak recoveries, the bank continued to grow its advances aggressively, largely in the agri and corporate segment. The corporate and SME segments continued to witness higher slippages with their GPNLs now 5.5% and 7.9%, respectively, while agri NPLs worsened further to c9.5%. Overall, GNPLs and NNPLs increased to 4.6% and 2.2%, respectively, while credit costs remained high at 145bps. Key sectors that witnessed slippages were iron and steel, one large account in aviation, textiles and agriculture. Restructured loans have also increased with the gross book now at 4.7% of loans and slippages at 26%.


Outlook: We believe margins will continue to aid SBI in providing for higher credit costs. However, it seems much of this margin improvement is driven by growth in riskier loan segments like SME and agriculture. We remain cautious on asset quality and adjust our estimates for FY12, FY13 and FY14, maintaining our overall cautious outlook. Downgrade to UW (from N), target price remains at INR2,000: SBI currently trades at 12- month forward multiples of 10.9x PE and 1.6x PB against its average five-year multiples of 13x PE and 1.8x PB. The stock has risen by 14% since the 2QFY12 results, largely due to a liquidity-driven rally in January. Fundamentally, however, there has been little improvement in the outlook and concerns on asset quality remain with lower earnings’ visibility. SBI continues to trade at 40% premium to PE and 30% premium to PB over its PSU peers, despite its lower RoE (15%) and RoA (0.8%). We therefore, maintain our target multiples at 9.3x PE and 1.4x PB, implying a 58% and 40% premium on PE and PB to peers, respectively. Key upside risks: Upturn in economic cycle; asset quality improves.


To read full report: SBI
RISH TRADER

>TATA CHEMICALS: Better‐than‐expected qtr, cautious in the near term

■ Higher trading sales led to better‐than‐expected Q3FY12 sales: Tata Chemical’s (TCL’s) net sales grew by 31.9% YoY to Rs38.1bn (PLe: Rs30.6bn), primarily led by higher trading sales and better realization in both the businesses (i.e. inorganic chemical and fertilizers). Overall soda ash volume was lower by 7.6% YoY to10.2Lac MT (down 10.4% QoQ), primarily on account of the shutdown of its GCIP (US) plant for ~30 days due to expansion in its soda ash capacity. Further, BMGL’s sales volume has impacted on account of a delay in the onset of winter. We believe that the company has done higher trading sales that resulted in better-than-expected sales (Purchase of traded product has gone up by 2.3x YoY). Inorganic chemical’s sales grew by 26.6% YoY to Rs16.7bn, primarily on account of better realization across the geographies and it has been supported by a favourable currency movement. Fertilizer sales grew by 40.4% YoY to Rs17.3bn on account of higher trading sales and manufactured non-urea sales volume (non-urea sales volume up 36.6% YoY). Further, it has been pushed up by higher farm-gate prices and subsidy of non-urea fertilizers.


■ Lower tax resulted in better‐than‐expected PAT: TCL’s EBITDA grew by 18.5% YoY to Rs5.2bn (PLe: Rs5.4bn). EBITDA margin was lower by 160bps YoY to 13.7% (down 520bps QoQ), primarily on account of higher input cost which has been partially mitigated by higher realization and efficient operations. EBIT margin of inorganic chemicals and fertilizer stood at 15.7% and 9.7%, respectively. Company has provided tax at lower rate i.e. 20.6% (Q3FY11: 29.8%, Q2FY12: 27.2%, PLe: 33.0%). PAT grew by 53.2% YoY to Rs2.2bn (PLe: Rs1.7bn). Company has taken forex loss reversal for the earlier period during the quarter for Rs328.4m (considered as an exceptional item).


■ Key Highlights for the quarter: During Q3FY12, company has completed 1Lac MT expansion of natural soda ash facility in GCIP as well as de-bottlenecking of SSP facility in India by 0.5Lac MT. Company is witnessing early signs of contraction in soda ash demand at present. Company expects that delay in onset of winter in UK during January could impact salt sales in the coming quarter. Company has suspended its operation in Khet se program due to longer time to breakeven the business. Company indicated that soda ash demand in the domestic business is healthy. In the US market, soda ash demand is robust. Company believes that Chinese market is slowing down and it could affect the global soda ash market in the medium term. Company has taken price hike of Rs500-600/MT in soda ash in India during Q3FY12. Further, company has taken ~US$15/MT price hike in rest of the geographies since January 01, 2012. Management guided that global fertilizer prices are coming off and it could lead to challenges in the domestic market, going forward.


■ Maintain ‘Accumulate’: Post several weak quarters, TCL has reported strong performance during Q2FY12 and Q3FY12. In-line with our expectation, management is witnessing early signs of soda ash demand contraction. We are cautious and believe that Soda Ash business could face a challenge on account of rising input costs and slow down in Europe/US, primarily in Auto/Infrastructure sector, going forward. At present, stock is trading at stock is trading at one-year forward P/E of ~10x v/s 5year band of 7x-11x. We maintain our ‘Accumulate’ rating on the stock, with the target price of Rs387. (i.e. 11xFY13E EPS).


RISH TRADER

>RATNAMANI METALS & TUBES

■ Revenues surge: Ratnamani Metals & Tubes (Ratnamani) reported another strong quarter in terms of revenue growth—in Q3FY2012 its revenues grew by 74.2% on a year-on-year (Y-o-Y) basis to Rs280.7 crore. The sales growth was backed by a 140% growth year on year (YoY) in the carbon steel tube and pipe (CS pipe) segment and a 57% Y-o-Y jump in the stainless steel tube and pipe (SS pipe) segment. The company is experiencing strong traction in the export business with exports contributing about 50% of the revenues.
 
■ OPM affected by forex loss: The gross profit margin (GPM) dipped by 180 basis points YoY to 36.7% despite an increase in the realisation mainly due to a higher raw material cost. The realisation for CS pipes increased by 29% YoY whereas that for SS pipes improved by 18.6%. The operating profit margin (OPM) was down by 560 basis points YoY to 14.9% despite a surge in the revenues. The fall was due to a foreign exchange (forex) loss of Rs12 crore on marked-to-market (MTM) forex denominated loans.
 
■ Net profit grows by 19.2%: On the back of a 70% fall in the other income and a 54.8% increase in the tax outgo (with the effective tax rate up by 520 basis points to 29.6%), the net profit growth was at 19.2% to Rs19.8 crore.  Marginally tweaked estimates: In view of the volume and revenue performance of the quarter, we have tweaked our estimates for FY2012 and FY2013. Our revenue growth estimates have increased by 3.9% and 4.6% for FY2012 and FY2013 respectively while our earnings estimates have increased by 5.4% and 4.5% for FY2012 and FY2013 respectively.


■  Valuation: Through the first nine months of FY2012, the company has reported a strong revenue performance. However, its margins have trended down consistently. The management commentary remains encouraging in terms of the potential opportunities in the oil & gas sector. Going forward, we expect the company’s revenues and profits to grow at a compounded annual growth rate (CAGR) of 30% and 15.6% respectively over FY2011-13. At the current market price, the stock is attractively trading at a price/earnings (PE) multiple of 4.7x its FY2013E earnings. On an enterprise value (EV)/EBITDA basis, it is trading at 3.5x FY2013E EBITDA. We maintain our Buy rating on the stock with a price target of Rs132.

■ Segmental performance

SS tubes and pipes

The business of SS pipes contributed 50.5% to the total revenues in the third quarter, down from 61.0% in the

corresponding quarter of the previous year. The gross sales from the SS pipe segment grew by 57.6% YoY to Rs137.7 crore. The growth was primarily driven by a 32.9% Y-o-Y growth in the volume whereas the realisation grew by 18.6% YoY.

CS pipes

The revenues from the CS pipe segment surged by 140.4% YoY to Rs137.5 crore. The growth was backed by a volume growth of 46.3% YoY. The realisation improved by 29%. The coating revenues surged to Rs39.2 crore, up from Rs2.3 crore in the corresponding quarter of the previous year.

■ Order book position

The order book reported an increasing trend—the order book as of end January 2012 was at Rs635 crore, up from Rs596 crore at the end of October 2011. The company added orders worth Rs230 crore in the quarter. Ratnamani is witnessing traction in the refinery and hydrocarbon segment. The power and oil & gas sectors account for close to 70-75% of its outstanding order book. The company expects to see further traction in the city gas distribution and cross-country pipelines. Of the order book, the export order book is about Rs179 crore whereas the domestic order book is worth Rs456 crore.

►   Marginally tweaked estimates: In view of the volume and revenue performance of the quarter, we have tweaked our estimates for FY2012 and FY2013. Our revenue growth estimates have increased by 3.9% and 4.6% for FY2012 and FY2013 respectively while our earnings estimates have increased by 5.4% and 4.5% for FY2012 and FY2013 respectively.

► Valuation: Through the first nine months of FY2012, the company has reported a strong revenue performance. However, its margins have trended down consistently. The management commentary remains encouraging in terms of the potential opportunities in the oil & gas sector. Going forward, we expect the company’s revenues and profits to grow at a CAGR of 30% and 15.6% respectively over FY2011-13. At the current market price, the stock is attractively trading at a PE multiple of 4.7x its FY2013E earnings. On an EV/EBITDA basis, it is trading at 3.5x FY2013E EBITDA. We maintain our Buy rating on the stock with a price target of Rs132.